Biofuels Polices in Asia: Trade effects on World Agricultural and Biofuels Trade

Keiji Ohga* and Tatsuji Koizumi **

* Professor, College of Bioresource Science, Nihon University, Japan ** Economist, Policy Research Institute, Ministry of Agriculture, Forestry and Fisheries, Japan

USDA Agricultural Outlook Forum, March 2, 2007

1

. Chinese bio-ethanol Program The number of automobile in china is increasing

<10 3 Cars>
30, 000 26, 937 25, 000

20, 000

15, 000

10, 000

5, 000

0 1985 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: China Statistical Yearbook 2005

Chinese petroleum consumption is increasing and its import of crude oil and oil products are rising too
<10 3 tons>
18, 000 16, 000

I por m t

14, 000

12, 000

10, 000

8, 000

6, 000

Expor t

4, 000

2, 000

0 1980 1990 1995 2000 2002 2003 2004 2005

Source: China Statistical Yearbook 2005

The increase in petroleum consumption is causing serious air pollution problems

In order to deal with energy security and the air pollution problem, the Chinese government is strongly promoting the National Fuel- ethanol program

In June 2002, the government started to make the use of fuel-ethanol blended gasoline mandatory

Chinese Fuel-Ethanol Program

Motorization
Increasing petroleum consumption Surging gasoline price
High Economic Growth

Promoting Industrialization

Concern for Energy Security

Concern for Environment

Fuel-Ethanol Program ( 2002

Demand

Inferior Corn

The Chinese Fuel-Ethanol Program

In 2004, the government introduced the compulsory use of a 10% ethanol blended in gasoline (E10) in provinces of Helongjiang, Jilin, Liaoning, Henan, and Anhui

The government expands the E10 program to 27 cities in the provinces of Shandong, Jiangsu, Hebei, and Hubei in 2006

Current and Future Fuel-Ethanol Production (1)

2007 pr odu ct ion ca pa cit y (MT/Yea r )

P r ovin ce

Com pa n y Na m e

2005 Ra w m a t er ia lspr odu ct ion (MT/Yea r )

Corn Corn Wh ea t 100,000 300,000 200,000

Su pply loca t ion

Su pply volu m e (MT/Yea r )

100,000 100,000 200,000 86,842 113,158 100,000 220,000

H eilon gjia n g J ilin H en a n

Ch in a Resou rces Alcoh ol Co. J ilin F u el E t h a n ol Co. H en a n Tia n Gu a n F u el-E t h a n ol Co.

100,000 H eilon gjia n g 600,000 J ilin Lia on in g 200,000 H en a n H u bei (9 cit ies) H ebei (4 cit ies)

An h u i

An h u i BBCA Bioch em ica l Co.

Corn

320,000

320,000 An h u i Sh a n don g (7 cit ies) J ia n gsu (5 cit ies)

Gu a n gxi H ebei H u bei Tot a l

Ch in a Resou rces Alcoh ol Co. Ch in a Resou rces Alcoh ol Co. Tia n Gu a n F u elE t h a n ol Co.

Ca ssa va Sweet pot a t o, corn et c Gra in s

0 0 0 920,000

110,000 Gu a n gxi 230,000 H ebei 100,000 H u bei 1,660,000

110,000 230,000 100,000

Source: Law Concerning Testing of the Extensive Use of Ethanol-Blended Gasoline for Automobiles and Regulations Concerning the Conduct of Testing of the Extensive Use of Ethanol-Blended Gasoline for Automobiles (2006)

Fuel-Ethanol Production Sites

China Resources Alcohol Co, Heilongjang (Corn) China Resources Alcohol Co, Hebei (From 2007: Sweat potato, corn etc) Jilin Fuel Ethanol Co, Jilin (Corn)

Henan Tian Guan FuelEthanol Co, Henan (Wheat) China Resources Alcohol Co, Guangxi (From 2007, Cassava)

Anhui BBCA Biochemical Co. (Corn) Tian Guan Fuel-Ethanol Co.Hubei (From 2007, Grains)

Source: Law Concerning Testing of the Extensive Use of Ethanol-Blended Gasoline for Automobiles and Regulations Concerning the Conduct of Testing of the Extensive Use of Ethanol-Blended Gasoline for Automobiles (2006)

Corn is the major source of fuel-ethanol in China

1) Corn 80 % of fuel-ethanol is made from corn in China Ethanol facilities in Heilongjiang, Jilin, and Anhui use corn

2) Wheat Wheat is used in Henan 3) Cassava

The Guagxi Zhuang autonomous region plans to build a fuel-ethanol plant The plant is scheduled to begin operations in October of 2007 at a production capacity of 110,000 MT 4) Others Potato, sorghum, rice, sugar, and lignocellulose are on experimental stage for fuel-ethanol production
9

Chinese fuel-ethanol production cost and agricultural production

Production(103 tons)
140, 000

Cor n

120, 000

100, 000

W heat

80, 000

60, 000

40, 000

Sor ghum
20, 000

Cassava
0 1, 000 2, 000 3, 000 4, 000 5, 000 6, 000

Production cost (Yuan/ton)

Note: Production data is derived from FAS, USDA, PS&D (2006) Production cost is derived from the Chinese National Development and Reform Commission
10

Chinese ethanol production cost is higher than other producers

US$/Lier t s
0. 5 0. 45 0. 4 0. 35 0. 3 0. 25 0. 2 0. 15 0. 1 0. 05 0

0. 44

0. 25 0. 20

Chi na

Br l azi

USA

Note: Chinese production cost is derived from the Chinese National Development and Reform Commission. Brazilian cost is derived from Sao Paulo Sugarcane Agroindustry (2005) The US cost is derived from USDA (2006) 11

Corn use for Fuel-Ethanol production

Although Chinese central government ordered to use inferior corn for fuel-ethanol production, facilities in Heilongjiang and Jilin use normal corn

If China continues to expand corn-based fuel-ethanol production, corn utilization ratio for ethanol will increase

Chinese central government stated to regulate corn-based fuelethanol production (Statement from National Development and Reform Commission in 21/12/2006)

12

Chinese corn production, consumption and ending stocks

(103 tons)
160, 000

Fuel-ethanol test plan started (2002)

Consum pton i

E10 Programs in 27 cities (2006 E10 Programs in 5 states (2004.10

Regulation for cornbased ethanol production(2006.12)

Endi St ng ocks
140, 000

Pr oducton i

120, 000

100, 000

80, 000

60, 000

40, 000

20, 000

95/96

97/98

2000/01

02/03

04/05

06/07

Source: FAS, USDA, PS&D(2007).

13

If China expands ethanol production from cassava, China will have to rely on imported cassava

<M T>
4, 000, 000

Chinese cassava imports

3, 500, 000

3, 000, 000

2, 500, 000

I ndonesi a Vi nam et

2, 000, 000

1, 500, 000

1, 000, 000

Thai l and

500, 000

0 2000 2001 2002 2003 2004 2005 2006 (Jan-M ay)

Source: USDA, Grain Report, China, Peoples Republic of Bio-fuels An Alternative Future for Agriculture, CH6049 (2006).

14

Summary (Chinese Bio-Ethanol Program)

80% of fuel-ethanol was made from corn in China in 2005

Chinese central government wants to regulate corn-based ethanol production

Chinese government wants to diversify the sources of fuel-ethanol production, especially to cassava

Technological innovation is required for developing cassava-based fuel-ethanol production

15

Malaysian Biodiesel Program Malaysian petroleum consumption has increased rapidly since 1990
<10 3 barrel / days>
800. 0

Consum pton i

Pr oducton i

700. 0

600. 0

500. 0

400. 0

300. 0

200. 0

100. 0

0. 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

16 Source: OPEC, OPEC 2005 (2006)

Malaysia is the second largest producer of palm oil

<103 tons>
45, 000 40, 000

35, 000

Rest of t he W ord l

30, 000

25, 000

M al a aysi

20, 000

15, 000

10, 000

I ndonesi a
5, 000

0 1980/81 90/91 2000/01 06/07

17

Source: FAS, USDA, PS&D. (2007)

Malaysia is the world largest exporter of palm oil

<103 tons>
30, 000

Rest oft he W ord l

25, 000

20, 000

M al a aysi

15, 000

10, 000

I ndonesi a
5, 000

0 1980/81 90/91 2000/01 06/07

18

Source : FAS, USDA, PS&D(2007)

International palm oil prices are unstable

U S$/ Tonne
800

700

600

500

400

300

200

100

0 1 4 1998 7 10 1 4 1999 7 10 1 4 2000 7 10 1 4 2001 7 10 1 4 2002 7 10 1 4 2003 7 10 1 4 2004 7 10 1 4 2005 7 10 1 4 2006 7 10

Note : Palm Okein RBD,Mal.cif.Rottesdam Source: Oil World, Oil World Annual 2006 (2006), Oil World, Oil World No.51/52, Vol.49. (2006) 19

Malaysia is promoting National Biofuel Policy

Escalating petroleum prices

Biodiesel boom in EU

Depletion of fossil fuel

Unstable palm oil price

Energy Security

Agricultural Development

Environmental Concern

National Biofuel Policy (August 2005)

20

National Biofuel Policy (Objectives)

Supplementing the depleting supply of fossil fuels with renewable resources

Mobilizing local resources

Exploiting local technology to generate energy for the transportation and industrial sectors

Enhancing exports of biofuels

Benefiting from the spin-off effect of more stable prices of palm oil
21

National Biofuel Policy (Implementation Plan)

Short term

Malaysian standard specifications of B5 (5 percent processed palm oil and 95 percent diesel) will be established

Selected government departments with their fleets of diesel vehicles will participate in trials for using B5 diesel

B5 diesel pumps for the public will be established at selected stations

22

National Biofuel Policy (Implementation Plan)

Medium Term Malaysian standard specifications of palm-oil-based biodiesel for domestic use and export will be established Legislation to mandate the use of B5 diesel will be passed and enforced

Long Term The proportion of processed palm oil in the diesel blend will be gradually increased Greater uptake of biofuels technology by Malaysian companies and foreign companies abroad

23

Biodiesel production in Malaysia

Biodiesel production in Malaysia is estimated 158 thousand tons in 2006 and 1.3 million tons in 2007 (PECC, Pacific Food System Outlook 2006-2007)

Government has granted licenses to 32 biodiesel plants, with potential annual capacity of 2.6 million tons
(PECC, Pacific Food System Outlook 2006-2007)

If Malaysia promotes B5 program in all regions, 500 thousand tons of biodiesel will be newly required

Malaysia may export biodiesel to European markets at the range of 300-350 thousand tons by 2010 (Asian Palm Oil for Euro Biodiesel, 2005). 24

Main Biodiesel Projects in Malaysia (2006)

Golden Hope Plantations Bhd (30,000t)

MPOB, Golden Hope Plantation Bhd (60,000t)

MPOB, JC Cjang Joho (60,000t)

Source: F.O.Licht, World Ethanol & Biofuels Report, Vol.4, No11,2006

25

Biodiesel Production costs in Malaysia

Raw material cost contributes about 80 percent of total production cost
( S $/ t ) U Lier R aw m at i eral Cr ude Pal O i ( PO ) m lC M et hanol C onver on fom C PO t Bi esel si r o odi C apialC ost t Varabl C ost i e Tot al 0. 39 0. 02 0. 07 0. 05 0. 54

Note: Based on date from Japan Petroleum Energy Center (2004).

26

Production Costs (International comparison)

<US Dol / Lier l ar t s>
3. 5

2. 9

2. 5

1. 5

0. 54 0. 5 0. 43

Pal O i ( al m l M aysi a)

Pal O i ( azi m l Br l )

Rapeseed ( Japan)

Note: Malaysians cots is based on date from Japan Petroleum Energy Center (2006). Brazilian cost is derived from Biodiesel in Brazil (2005) Japanese cost is derived from Japans Ministry of Agriculture, Forestry and Fisheries 27

Palm Oil production in Malaysia

Malaysian palm oil production will expand to the future Particularly in Sarawak, East Malaysia

<10 3 tons>
16, 000 14, 000

12, 000

E ast M al aysi a

10, 000

8, 000

6, 000

P eni nsul a M al aysi a

4, 000

2, 000

0 1998 1999 2000 2001 2002 2003

Source: MPOB (2005)

28

Malaysias potential for palm area expansion is estimated to be about 2.0 million ha, which can produce 10 million ton of CPO
CPO Production in Malaysia

Cur entpal Ar r m ea Pot i ar expansi ental ea on Tot natonall ar al i and ea Cur entpr r oducton i Pr oducton pr i ospect

3. m ilon ha 6 li About2. m ilon ha 0 li 33. m ilon ha 0 li 12. m ilon t/ 1 li year 14 m il t i 2005 lon on n 19 m ilon t i 2020 li on n

Source: Japan Petroleum Energy Center (2004)

29

Malaysian biodiesel export

Malaysia wants to export biodiesel to European market

Malaysian palm oil may become a raw material of European biodiesel production

Whether European market chooses CPO or biodiesel from Malaysia is uncertain. It depends on the quality and cost of biodiesel

30

Benefits for Malaysia

New demand for palm oil Mutual beneficial effects on petroleum and palm oil sectors Efficient utilization of raw materials Mitigating the effects of petroleum price escalation Savings in foreign exchange Environment-friendly source of energy Achieving socio-economic safety net

31

Concerns for biodiesel expansion

Expansion of palm oil production is possible in Malaysia

1.0% of palm oil production is used for biodiesel in 2006, and 7.9 % of palm oil production will be used for biodiesel in 2007

The expansion may cause a high international palm oil price

32

In Malaysia, 11% of the total land area is already devoted to palm oil
(F.O.Licht 2006)

Between 1985 and 2000, the development of palm oil plantations was responsible for an estimated 87 % of deforestation in Malaysia (Friends of the
Earth 2005)

Sustainability of palm oil production and biodiversity are main concern for expanding bio-diesel production

33

Summary (Malaysian Biodiesel Program)

Malaysia will expand biodiesel production from palm oil

Malaysia may meet both domestic and international demand

Malaysian biodiesel programs can contribute to mitigate energy in security and be beneficial for palm oil producers

However, this program may cause to increase international palm oil price

This program can damage for sustainability of palm oil production and biodiversities in Malaysia

34

Japanese Bio-Ethanol program

Preventing global warming

Development of strategic industries

Vitalization of rural and farming communities

Biomass Nippon Strategy was formulated in December 2002

35

Revised Biomass Nippon Strategy

Kyoto Protocol was put into effect in February 2005

Revised Biomass Nippon Strategy was formulated in March 2006

Promotion of utilization of biomass for transportation fuel, particularly of domestic biomass

36

Current Bio-Ethanol Production

Japanese bio-ethanol production is at an experimental stage Current production level is 30 kl (April 2006)
Tokachi area, Hokkaido (From wheat and corn unsuited to food)

Shinjo city, Yamagata (From sorghum)

Maniwa city, Okayama (From wasted woods)

Sakai city, Osaka (From wasted woods) Ie village, Okinawa (From Molasses)

Miyako Island, Okinawa (From Molasses)

37

For Further Promotion of Domestic Bio-Ethanol

The abandoned arable land can be used to grow crops for bio-ethanol production

Farmland planted with crops may be used to provide raw materials for bio-ethanol

Technological innovation is the key

38

Expected Result Food and Agriculture

Reinforcement of international competitiveness to agriculture Improvement and maintenance of food supplying capability

Environment
Contribution to fulfillment of the target dedicated by the Kyoto Protocol Actions in consideration of Post-Protocol situation

Energy
Action to cope with rising crude oil price Diversification of energy sources (energy security)

39

Production cost and fuel-tax need to be reduced to expand bio-ethanol production in Japan
<Yen
160 140

Lier t >

148. 4yen

144. 2yen

151. 8yen

121. 0yen
120 100 80 60 40 20 0
Fuel Tax

53. 8
I or Tarf m t if

53. 8 53. 8

53. 8

18. 2
I por m t Prce i

Pr ocessi ng C ost

46. 0 83. 4

66. 2

G at prce e i fom oi r l M anuf ur act e

76. 4

R R aw M at i eral C ost

7. 0

52. 0

G asolne i

i asses I pored Et m t hanol D om estc M ol fom Br l r azi

W heat( on-ood N f gr ade)

40

Summary (Japanese Bio-Ethanol Program)

Japanese government promotes bio-ethanol production and utilization for automobile

Securing raw materials for bio-ethanol, reduction of production cost, tax reduction for bio-ethanol are needed to expand bio-ethanol production in Japan

Further technical innovation is the key factor to promote domestic bio-ethanol production

41

Concluding Remarks
The governments in Asian countries are promoting bio-fuel programs

Their raw materials for bio-fuels have various sources

Increasing bio-fuel consumption would compete with food and feed

The governments in Asian countries are working for bio-fuel programs, which will not conflict with food security

42

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